Proton Holdings Bhd is a national carmaker in Malaysia. In late 2007, the Malaysian government owned 43 percent of the company. The remaining stock of the company traded on public stock exchanges.
Proton was among Malaysia’s worst performing companies in 2005, after competition from foreign carmakers and a lack of new models cost the firm significant market share and profits. It has since hired a new chief executive, sold its lossmaking MV Agusta motorbike firm, and pledged to find a new technology partner. The company has been under substantial pressure, with its share of domestic sales falling from 75 percent to 44 percent over the past decade.
Analysts polled in late 2007 noted that the company’s new management had made several moves to revamp the company and that these efforts were bearing fruit in terms of increased sales volume and market share. New models such as the Persona, a sport edition of Savvy, and Satria Neo were relative successes. The management also implemented stringent cost controls. Nonetheless, analysts concluded that Proton’s long-run ability to survive depends on whether it can achieve increased production volume and economies of scale. Without sufficient scale it is unlikely that the company will survive the intense local and worldwide competition. The analysts assert that by itself, Proton would find it hard to achieve economies of scale and to develop new technologies.
Suppose that you are hired as a consultant to advise Proton’s management. What do the analysts mean when they say that Proton needs to achieve economies of scale to be competitive? Discuss at a general level the types of actions that the company might want to consider to achieve the necessary scale.
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